UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended ................................... JUNE 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File No.: 000-23809
FIRST SENTINEL BANCORP, INC.
(exact name of registrant as specified in its charter)
DELAWARE 22-3566151
(State or other jurisdiction of (IRS Employer I.D. No.)
incorporation or organization)
1000 WOODBRIDGE CENTER DRIVE, WOODBRIDGE, NJ 07095
(Address of principal executive offices)
Registrant's telephone number, including area code: (732) 726-9700
NOT APPLICABLE
Former Name, Address, and Fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT AUGUST 1, 2000
----------------------------- -----------------------------------------
Common Stock 34,608,638 shares
<PAGE>
FIRST SENTINEL BANCORP, INC.
INDEX TO FORM 10-Q
Page #
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition as of
June 30, 2000 and December 31, 1999 3
Consolidated Statements of Income for the three and
six months ended June 30, 2000 and 1999 4
Consolidated Statements of Stockholders' Equity for
the six months ended June 30, 2000 and 1999 5
Consolidated Statements of Cash Flows for the six months
ended June 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk 13
PART II. OTHER INFORMATION 14
SIGNATURES 15
2
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FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data) (Unaudited)
June 30, December 31,
2000 1999
---------- ------------
ASSETS
Cash and due from banks ............................ $ 20,456 $ 11,532
Federal funds sold ................................. -- 19,075
---------- ----------
Total cash and cash equivalents .................. 20,456 30,607
Federal Home Loan Bank of New York (FHLB-NY)
stock, at cost ................................... 19,643 18,100
Investment securities available for sale ........... 241,849 213,590
Mortgage-backed securities available for sale ...... 541,835 575,159
Loans available for sale, net ...................... 585 --
Loans receivable, net .............................. 1,126,341 1,016,116
Interest and dividends receivable .................. 13,460 12,278
Premises and equipment, net ........................ 15,985 16,503
Excess of cost over fair value of net
assets acquired .................................. 6,682 7,106
Other assets ....................................... 16,505 15,237
---------- ----------
Total assets ..................................... $2,003,341 $1,904,696
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits ........................................... $1,225,011 $1,213,724
Borrowed funds ..................................... 540,775 422,000
Advances by borrowers for taxes and insurance ...... 9,893 8,385
Other liabilities .................................. 9,977 16,007
---------- ----------
Total liabilities .............................. 1,785,656 1,660,116
---------- ----------
STOCKHOLDERS' EQUITY
Preferred Stock; authorized 10,000,000 shares;
none issued and outstanding ...................... -- --
Common Stock, $.01 par value, 85,000,000
shares authorized;
43,106,742 and 34,605,250 shares issued and
outstanding at 6/30/00 and
43,106,742 and 38,443,350 shares issued and
outstanding at 12/31/99 ........................ 431 431
Paid-in capital .................................... 201,361 200,781
Retained earnings .................................. 124,882 117,922
Accumulated other comprehensive loss ............... (21,835) (17,302)
Less: Treasury stock (8,464,711 and
4,628,604 shares at June 30, 2000 and
December 31, 1999, respectively) ................. (72,231) (41,229)
Common stock acquired by the Employee Stock
Ownership Plan (ESOP) ............................ (11,697) (12,156)
Common stock acquired by the Recognition and
Retention Plan (RRP) ............................. (3,226) (3,867)
---------- ----------
Total stockholders' equity ......................... 217,685 244,580
---------- ----------
Total liabilities and stockholders' equity ......... $2,003,341 $1,904,696
========== ==========
See accompanying notes to the unaudited consolidated financial statements.
3
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FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share data) (Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans .............................................................. $ 20,492 $ 16,716 $ 39,676 $ 32,911
Investment and mortgage-backed securities
available for sale ............................................... 13,681 13,766 27,344 27,515
----------- ----------- ----------- -----------
Total interest income ........................................... 34,173 30,482 67,020 60,426
----------- ----------- ----------- -----------
INTEREST EXPENSE:
Deposits:
NOW and money market demand ....................................... 2,349 2,327 4,732 4,609
Savings ........................................................... 942 982 1,883 1,989
Certificates of deposit ........................................... 8,587 8,561 16,658 17,397
----------- ----------- ----------- -----------
Total interest expense - deposits ............................... 11,878 11,870 23,273 23,995
Borrowed funds ...................................................... 7,465 4,040 14,299 7,827
----------- ----------- ----------- -----------
Total interest expense .......................................... 19,343 15,910 37,572 31,822
----------- ----------- ----------- -----------
Net interest income ............................................. 14,830 14,572 29,448 28,604
Provision for loan losses ............................................ 393 450 786 900
----------- ----------- ----------- -----------
Net interest income after provision for loan losses ............. 14,437 14,122 28,662 27,704
----------- ----------- ----------- -----------
NON-INTEREST INCOME:
Fees and service charges ........................................... 553 592 1,130 1,233
Net (loss) gain on sales of loans and securities
available for sale ............................................... (78) 318 (97) 577
Other income ....................................................... 226 93 406 240
----------- ----------- ----------- -----------
Total non-interest income ....................................... 701 1,003 1,439 2,050
----------- ----------- ----------- -----------
NON-INTEREST EXPENSE:
Compensation and benefits .......................................... 3,625 3,456 7,281 6,801
Occupancy .......................................................... 560 545 1,171 1,089
Equipment .......................................................... 438 378 862 795
Advertising ........................................................ 405 353 735 603
Federal deposit insurance .......................................... 65 191 131 388
Amortization of intangibles ........................................ 212 212 424 425
General and administrative ......................................... 948 1,171 1,980 2,264
----------- ----------- ----------- -----------
Total non-interest expense ...................................... 6,253 6,306 12,584 12,365
----------- ----------- ----------- -----------
Income before income tax expense ................................ 8,885 8,819 17,517 17,389
Income tax expense ................................................... 3,089 2,939 5,985 5,898
----------- ----------- ----------- -----------
Net income ...................................................... $ 5,796 $ 5,880 $ 11,532 $ 11,491
=========== =========== =========== ===========
Basic earnings per share ............................................. $ 0.17 $ 0.15 $ 0.33 $ 0.28
=========== =========== =========== ===========
Weighted average shares outstanding - Basic .......................... 33,886,173 40,489,683 34,773,117 40,694,868
=========== =========== =========== ===========
Diluted earnings per share ........................................... $ 0.17 $ 0.14 $ 0.33 $ 0.28
=========== =========== =========== ===========
Weighted average shares outstanding - Diluted ........................ 34,149,484 41,549,270 35,051,300 41,628,684
=========== =========== =========== ===========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
4
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands) (Unaudited)
<TABLE>
<CAPTION>
Accumulated
Other Common Common Total
Compre- Stock Stock Stock-
Common Paid In Retained hensive Treasury Acquired Acquired holders'
Stock Capital Earnings Income(Loss) Stock by ESOP by RRP Equity
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> C>
Balance at December 31, 1998 .......... $431 $ 201,105 $ 112,601 $ 2,498 $ (3,664) $(13,073) $ (79) $ 299,819
Net income for the six months ended
June 30, 1999 ...................... -- -- 11,491 -- -- -- -- 11,491
Cash dividends declared ($.11) ........ -- -- (4,517) -- -- -- -- (4,517)
Net change in unrealized gain/(loss)
on securities available for sale ... -- -- -- (11,824) -- -- -- (11,824)
Purchases of treasury stock ........... -- -- -- -- (8,991) -- -- (8,991)
Exercise of stock options ............. -- 6 (2,418) -- 3,360 -- -- 948
Transfer of treasury stock to RRP ..... -- -- (656) -- 5,704 -- (5,048) --
Amortization of RRP ................... -- -- -- -- -- -- 561 561
Amortization of ESOP .................. -- (26) -- -- -- 458 -- 432
------------------------------------------------------------------------------------------
Balance at June 30, 1999 .............. $431 $ 201,085 $ 116,501 $ (9,326) $ (3,591) $(12,615) $(4,566) $ 287,919
==========================================================================================
Balance at December 31, 1999 .......... $431 $ 200,781 $ 117,922 $(17,302) $(41,229) $(12,156) $(3,867) $ 244,580
Net income for the six months
ended June 30, 2000 ................ -- -- 11,532 -- -- -- -- 11,532
Cash dividends declared ($.12) ........ -- -- (4,440) -- -- -- -- (4,440)
Net change in unrealized gain/(loss)
on securities available for sale ... -- -- -- (4,533) -- -- -- (4,533)
Purchases of treasury stock ........... -- -- -- -- (31,124) -- -- (31,124)
Exercise of stock options ............. -- -- (75) -- 122 -- -- 47
Tax benefit on stock options .......... -- 600 -- -- -- -- -- 600
Purchase and retirement of common
stock .............................. -- (14) -- -- -- -- -- (14)
Amortization of RRP ................... -- (6) -- -- -- -- 641 635
Amortization of ESOP .................. -- -- (57) -- -- 459 -- 402
------------------------------------------------------------------------------------------
Balance at June 30, 2000 .............. $431 $ 201,361 $ 124,882 $(21,835) $(72,231) $(11,697) $(3,226) $ 217,685
==========================================================================================
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
5
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income .................................................................................... $ 11,532 $ 11,491
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation of premises and equipment ........................................................ 717 682
Amortization of excess of cost over fair value of assets acquired ............................. 424 425
Amortization of ESOP .......................................................................... 402 432
Amortization of RRP ........................................................................... 641 561
Net amortization of premiums and accretion of discounts and deferred fees ..................... 597 (482)
Provision for loan losses ..................................................................... 786 900
Provision for losses on real estate owned ..................................................... -- 21
Loans originated for sale ..................................................................... (1,445) (7,023)
Proceeds from sales of mortgage loans available for sale ...................................... 847 6,999
Net loss (gain) on sales of loans and securities available for sale ........................... 97 (577)
Net loss on sales of real estate owned ........................................................ 49 --
(Increase) decrease in interest and dividends receivable ...................................... (1,182) 1,400
Increase (decrease) in other liabilities ...................................................... 341 (689)
Increase in other assets ...................................................................... 608 1,796
-------- --------
Net cash provided by operating activities ............................................... 14,414 15,936
-------- --------
Cash flows from investing activities:
Proceeds from sales/calls/maturities of investment securities available for sale .............. 18,647 101,753
Purchases of investment securities available for sale ......................................... (48,102) (69,990)
Purchase of FHLB-NY stock ..................................................................... (1,543) --
Proceeds from sales of mortgage-backed securities available for sale .......................... 73,207 72,201
Principal payments on mortgage-backed securities .............................................. 47,920 130,341
Purchases of mortgage-backed securities available for sale .................................... (93,950) (219,687)
Principal repayments on loans ................................................................. 97,351 137,202
Origination of loans .......................................................................... (174,865) (174,258)
Purchases of mortgage loans ................................................................... (33,599) (12,417)
Proceeds from sale of real estate owned ....................................................... 306 1,252
Purchases of premises and equipment ........................................................... (199) (921)
-------- --------
Net cash used in investing activities ................................................... (114,827) (34,524)
-------- --------
Cash flows from financing activities:
Purchase of treasury stock .................................................................... (31,124) (8,991)
Purchase and retirement of common stock ....................................................... (14) --
Stock options exercised ....................................................................... 47 948
Cash dividends paid ........................................................................... (10,217) (4,517)
Net increase (decrease) in deposits ........................................................... 11,287 (14,188)
Net increase in borrowed funds ................................................................ 118,775 23,500
Net increase in advances by borrowers for taxes and insurance ................................. 1,508 1,255
-------- --------
Net cash provided by (used in) financing activities ..................................... 90,262 (1,993)
-------- --------
Net decrease in cash and cash equivalents ............................................... (10,151) (20,581)
Cash and cash equivalents at beginning of period ................................................. 30,607 37,631
-------- --------
Cash and cash equivalents at end of period ....................................................... $ 20,456 $ 17,050
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ................................................................................... $ 36,910 $ 31,339
Income taxes ............................................................................... 3,030 4,619
Non cash investing and financing activities for the period:
Transfer of loans to real estate owned ................................................... $ 104 $ 1,242
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
6
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") for interim
financial information and in conformity with the instructions to Form 10-Q and
Article 10 of Regulation S-X for First Sentinel Bancorp, Inc. ("First Sentinel"
or the "Company") and its wholly-owned subsidiaries, First Savings Bank, ("First
Savings" or the "Bank") Pulse Investment, Inc., Pulse Insurance Services, Inc.
and Pulse Real Estate, Inc., and the Bank's wholly-owned subsidiaries, FSB
Financial Corp., and 1000 Woodbridge Center Drive, Inc.
In the opinion of management, all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial condition, results
of operations, and changes in cash flows have been made at and for the three and
six months ended June 30, 2000 and 1999. The results of operations for the three
and six months ended June 30, 2000, are not necessarily indicative of results
that may be expected for the entire fiscal year ending December 31, 2000. These
interim financial statements should be read in conjunction with the December 31,
1999 Annual Report to Stockholders.
(2) EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income by the daily
average number of common shares outstanding during the period. Potential
dilutive common shares are not included in the calculation.
Diluted earnings per share is computed similarly to basic earnings per share
except that the denominator is increased to include the number of additional
common shares that would have been outstanding if all potential dilutive common
shares were issued utilizing the treasury stock method.
Calculation of Basic and Diluted Earnings Per Share
----------------------------------------------------
(dollars in thousands, except per share data)
Three Months ended Six Months ended
June 30, June 30,
------------------------ ------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Net income .................. $ 5,796 $ 5,880 $ 11,532 $ 11,491
=========== =========== =========== ===========
Basic weighted-average
common shares
outstanding ............... 33,886,173 40,489,683 34,773,117 40,694,868
Plus: Dilutive stock
options and awards ........ 263,311 1,059,587 278,183 933,816
----------- ----------- ----------- -----------
Diluted weighted-average
common shares
outstanding ............... 34,149,484 41,549,270 35,051,300 41,628,684
=========== =========== =========== ===========
Net income per common share:
Basic .................... $ 0.17 $ 0.15 $ 0.33 $ 0.28
=========== =========== =========== ===========
Diluted .................. $ 0.17 $ 0.14 $ 0.33 $ 0.28
=========== =========== =========== ===========
(3) DIVIDENDS
Based upon current operating results, the Company declared cash dividends of
$0.06 per share on April 24, 2000, payable May 26, 2000, to stockholders of
record on May 12, 2000.
7
<PAGE>
(4) COMMITMENTS AND CONTINGENCIES
At June 30, 2000, the Company had the following commitments: (i) to originate
loans of $93.2 million; (ii) to purchase mortgage loans of $22.6 million; (iii)
to purchase mortgage-backed securities of $10.0 million, (iv) unused equity
lines of credit of $48.9 million; (v) unused commercial lines of credit of $7.7
million; (vi) unused construction lines of credit of $56.3 million; and (vii)
letters of credit outstanding totaling $2.6 million. Further, certificates of
deposits, which are scheduled to mature and/or rollover in one year or less,
totaled $500.5 million at June 30, 2000.
(5) ALLOWANCE FOR LOAN LOSSES
The following table presents the activity in the allowance for loan losses (in
thousands):
For the six months ended
June 30,
----------------------
2000 1999
-------- --------
Balance at beginning of period $ 11,004 $ 9,505
Provision charged to operations 786 900
Charge offs, net of recoveries (34) (79)
-------- --------
Balance at end of period $ 11,756 $ 10,326
======== ========
(6) COMPREHENSIVE INCOME
Total comprehensive income (loss), consisting of net income and the net change
in unrealized gain/(loss) on securities available for sale, was $3.4 million and
$(4.3) million for the quarter ended June 30, 2000 and 1999, respectively. For
the six months ended June 30, 2000 and 1999, comprehensive income (loss) totaled
$7.0 million and $(333,000), respectively.
(7) RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB Opinion No. 25." The interpretation
clarifies certain issues with respect to the application of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
Opinion No. 25). The interpretation results in a number of changes in the
application of APB Opinion No. 25, including the accounting for modifications to
equity awards, as well as extending APB Opinion No. 25 accounting treatment to
options granted to outside directors for their services as directors. The
provisions of the interpretation were effective July 1, 2000 and apply
prospectively, except for certain modifications to equity awards made after
December 15, 1998. The initial adoption did not have a significant impact on the
Company's financial statements.
In June 2000, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an Amendment to FASB Statement No. 133." SFAS No. 138 amends certain
aspects of SFAS No. 133 to simplify the accounting for derivatives and hedges
under SFAS No. 133. SFAS No. 138 is effective upon the company's adoption of
SFAS No. 133 (January 1, 2001). The initial adoption of SFAS No. 138 is not
expected to have a material impact on the Company's financial statements.
8
<PAGE>
FIRST SENTINEL BANCORP, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL.
Statements contained in this report that are not historical fact are
forward-looking statements, as that term is defined in the Private Securities
Litigation Reform Act of 1995. Such statements may be characterized as
management's intentions, hopes, beliefs, expectations or predictions of the
future. It is important to note that such forward-looking statements are subject
to risks and uncertainties that could cause actual results to differ materially
from those projected in such forward-looking statements. Factors that could
cause future results to vary materially from current expectations include, but
are not limited to, changes in interest rates, competition by larger financial
institutions, deposit and loan growth, changes in the quality or composition of
the Company's loan and investment portfolios, changes in accounting principles,
policies or guidelines, legislative and regulatory changes, changes in the
economy generally and changes in business conditions in the New Jersey market.
ASSETS. Total assets grew to $2.0 billion at June 30, 2000, reflecting an
increase of $98.6 million, or 5.2% from December 31, 1999. The change in assets
consisted primarily of increases in loans receivable and investment securities
available for sale, offset by decreases in mortgage-backed securities ("MBS")
available for sale and cash and cash equivalents.
Net loans increased $110.8 million, or 10.9%, to $1.1 billion as of June 30,
2000, from $1.0 billion at December 31, 1999. Total loan originations for the
six months ended June 30, 2000, were $176.3 million, as compared to $181.3
million for the same period in 1999. Adjustable-rate, single-family first
mortgage loans totaled $74.7 million, or 42.4% of production, while fixed-rate,
single-family first mortgage loan originations accounted for $11.8 million, or
6.7% of total originations for the first six months of 2000. Also during the
first six months of 2000, construction lending totaled $33.9 million, or 19.2%
of total originations, while commercial real estate, commercial and multi-family
loan originations totaled $24.9 million, or 14.1%. During the same period,
consumer loan originations, including home equity loans and credit lines,
totaled $31.0 million, or 17.6% of total originations. In addition, the Company
purchased $33.6 million of adjustable-rate, single-family first mortgage loans
through correspondents during the six months ended June 30, 2000. Purchased
loans are re-underwritten by the Bank and are extended under the same terms and
conditions as the Bank's direct loan originations. Repayment of principal on
loans totaled $97.4 million for the six months ended June 30, 2000, as compared
to $137.2 million for the same period in 1999. Management has emphasized the
origination of loans in an effort to increase loans as a percentage of assets.
While management intends to continue to actively seek to originate loans, the
future levels of loan originations and repayments will be significantly
influenced by external interest rates and other economic factors outside of the
control of the Company.
Investment securities available for sale increased $28.3 million, or 13.2%, to
$241.8 million as of June 30, 2000 from $213.6 million at December 31, 1999. For
the six months ended June 30, 2000, purchases of investment securities available
for sale totaled $48.1 million, while sales, calls and maturities totaled $18.6
million. Purchases during the period consisted primarily of debt securities
issued by U.S. corporations and government-sponsored agencies. In addition, a
market value decrease of $1.4 million resulted from the change in the value of
the investment securities portfolio as interest rates rose through the first six
months of 2000.
Mortgage-backed securities ("MBS") available for sale decreased $33.3 million,
or 5.8%, to $541.8 million at June 30, 2000, from $575.2 million at December 31,
1999. The decrease was primarily due to sales and principal repayments of $73.4
million and $47.9 million, respectively, exceeding purchases of $94.0 million
for the six month period ended June 30, 2000. Net proceeds were used primarily
to fund loan growth and repurchase the Company's common stock. In addition, a
market value decrease of $5.3 million resulted from the change in the value of
the MBS portfolio as interest rates rose through the first six months of 2000.
9
<PAGE>
Cash and cash equivalents decreased $10.2 million from December 31, 1999 to
$20.5 million at June 30, 2000, as liquidity requirements related to the century
date change were satisfied.
LIABILITIES. Total deposits increased $11.3 million, or 0.9%, to $1.2 billion at
June 30, 2000. This growth took place primarily in core deposits, consisting of
checking, savings and money market accounts. These core deposit categories grew
by $10.6 million to $574.7 million, and accounted for 46.9% of total deposits at
June 30, 2000.
Borrowed funds increased $118.8 million, or 28.2%, to $540.8 million at June 30,
2000, from $422.0 million at December 31, 1999. The increased borrowed funds
were used primarily to fund loan originations. Advances by borrowers for taxes
and insurance increased $1.5 million, or 18.0%, to $9.9 million at June 30,
2000, from $8.4 million at December 31, 1999, primarily due to the increase in
the residential loan portfolio. Other liabilities decreased $6.0 million, or
37.7%, to $10.0 million at June 30, 2000, from $16.0 million at December 31,
1999, primarily due to the payment of a $5.8 million special dividend in January
2000 which was accrued at December 31, 1999.
CAPITAL. The Company's stockholders' equity decreased $26.9 million, or 11.0%,
to $217.7 million at June 30, 2000, from $244.6 million at December 31, 1999.
The primary reasons for the decrease in equity were the repurchase of $31.1
million of the Company's common stock, the increase in the net unrealized loss
on securities available for sale of $4.5 million, and cash dividends declared of
$4.4 million. These decreases were partially offset by net income of $11.5
million for the six months ended June 30, 2000.
The Federal Deposit Insurance Corporation requires that the Bank meet minimum
leverage, Tier 1 and total risk-based capital requirements. At June 30, 2000,
the Bank exceeded all regulatory capital requirements, as follows (dollars in
thousands):
Required Actual Excess of
----------------- ------------------ Actual over
% of % of Regulatory
Amount Assets Amount Assets Requirements
------- ------ -------- ------ --------
(Dollars in thousands)
(Unaudited)
Leverage Capital $77,489 4.00% $181,308 9.36% $103,819
Risk-based Capital:
Tier 1 40,597 4.00% 181,308 17.86% 140,711
Total 81,194 8.00% 193,064 19.02% 111,870
LIQUIDITY AND CAPITAL RESOURCES. The Company's primary sources of funds are
deposits; proceeds from principal and interest payments on loans and
mortgage-backed securities; sales of loans, mortgage-backed securities and
investments available for sale; maturities or calls of investment securities and
short-term investments; and, to an increasing extent, advances from the FHLB-NY
and other borrowed funds. While maturities and scheduled amortization of loans
and mortgage-backed securities are a predictable source of funds, deposit cash
flows and mortgage prepayments are greatly influenced by general interest rates,
competition, and economic conditions.
The most significant sources of funds for the first six months of 2000 were a
net increase in borrowed funds totaling $118.8 million, and principal repayments
and prepayments of loans and mortgage-backed securities, totaling $97.4 million
and $47.9 million, respectively. Other significant sources of funds for the six
months ended June 30, 2000, were sales of MBS available for sale totaling $73.2
million, sales and calls of investment securities available for sale of $18.6
million, and increased deposits of $11.3 million. If necessary, the Company has
additional borrowing capacity with FHLB-NY, including an available overnight
line of credit of up to $50.0 million. At June 30, 2000, the Company had
unpledged investment securities and MBS available for sale with a market value
of $315.5 million.
The primary investing activities of the Company for the first six months of 2000
were the origination of loans totaling $176.3 million, purchases of
mortgage-backed securities available for sale totaling $94.0 million, and the
purchases of investment securities available for sale totaling $48.1 million.
Other significant uses of funds during the six months ended June 30, 2000, were
$33.6 million in purchases of mortgage loans, $31.1 million in repurchases of
common stock and $10.2 million in cash dividends paid.
10
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COMPARISON OF OPERATING RESULTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000
AND 1999.
RESULTS OF OPERATIONS. Net income for the three and six months ended June 30,
2000, totaled $5.8 million and $11.5 million, respectively. This represented a
decrease of $84,000 and an increase of $41,000, or 1.4% and 0.4%, respectively,
over net income of $5.9 million and $11.5 million for the comparable 1999
periods. For the quarter ended June 30, 2000, basic and diluted earnings per
share were $0.17, representing a 17.8% and 19.9% increase over second quarter
1999 basic and diluted earnings per share of $0.15 and $0.14, respectively. For
the six months ended June 30, 2000, basic and diluted earnings per share were
$0.33, representing a 17.5% and 19.2% increase, respectively, over basic and
diluted earnings per share of $0.28 for the first six months of 1999.
Annualized return on average equity improved to 10.38% and 10.03% for the three
and six months ended June 30, 2000, respectively, from 8.00% and 7.80% for the
comparable 1999 periods. Annualized return on average assets was 1.18% for the
three and six months ended June 30, 2000, compared with 1.25% and 1.23% for the
three and six months ended June 30 1999, respectively.
INTEREST INCOME. Interest income for the three and six months ended June 30,
2000, increased by $3.7 million and $6.6 million, or 12.1% and 10.9%,
respectively, from the same periods in 1999.
Interest on loans increased $3.8 million and $6.8 million, or 22.6% and 20.6%,
respectively, to $20.5 million and $39.7 million for the three and six months
ended June 30, 2000, as compared to $16.7 million and $32.9 million for the same
periods in 1999. The average balance of the loan portfolio for the six month
period ended June 30, 2000 increased to $1.1 billion from $899.5 million for
1999, while the average yield on the portfolio increased to 7.41% for the six
months ended June 30, 2000, from 7.32% for the same period in 1999.
Interest on securities declined $85,000 and $171,000, or 0.6% and 0.6%,
respectively, to $13.7 million and $27.3 million for the three and six months
ended June 30, 2000, as compared to $13.8 million and $27.5 million for the same
periods in 1999. The average balance of the investment, FHLB stock and MBS
available for sale portfolios totaled $857.8 million, with an annualized yield
of 6.38% for the six months ended June 30, 2000, compared with an average
balance of $918.0 million with an annualized yield of 5.99% for the six months
ended June 30, 1999.
INTEREST EXPENSE. Interest expense increased $3.4 million to $19.3 million for
the three months ended June 30, 2000, compared to $15.9 million for the same
period in 1999. For the six months ended June 30, 2000, interest expense
increased $5.8 million to $37.6 million, compared to $31.8 million for the
comparable 1999 period.
Interest expense on deposits increased $8,000 and decreased $722,000, or 0.1%
and 3.0%, respectively, to $11.9 million and $23.3 million for the three and six
months ended June 30, 2000, as compared to $11.9 million and $24.0 million for
the same periods in 1999. Management continued to concentrate its efforts on
increasing the level of core accounts as a percentage of overall deposits and
decreasing reliance on higher-costing certificate accounts as a funding source.
The increase in the average balance of NOW and money market demand and savings
accounts, along with the increase in the average balance of non-interest bearing
deposits, reflects this strategy. The average balance of these core accounts
totaled $571.7 million for the six months ended June 30, 2000, as compared to
$554.7 million for the same period in 1999. Within these core accounts,
non-interest bearing deposits averaged $47.9 million for the six months ended
June 30, 2000, up from $42.3 million for the comparable 1999 period. The average
balance of certificates of deposit decreased to $646.5 million for the six
months ended June 30, 2000, from $702.6 million for the same period in 1999. The
average interest cost on all deposits for the six months ended June 30, 2000 and
1999 remained at 3.82%, despite a rising rate environment, as a result of these
favorable shifts in deposit composition. The average cost of certificates over
the six month period ended June 30, 2000, was 5.15%, as compared to 4.95% over
the same period in 1999.
11
<PAGE>
Interest on borrowed funds for the three and six months ended June 30, 2000,
increased $3.4 million and $6.5 million, or 84.8% and 82.7%, respectively, to
$7.5 million and $14.3 million, compared to $4.0 million and $7.8 million for
the same respective periods in 1999. The increase in the average balance of
borrowed funds for the six months ended June 30, 2000, to $483.1 million, from
$292.2 million was attributable to management's continuing strategy to fund
earning asset growth through the use of borrowed funds, where accretive to
earnings. The average interest rate paid on borrowed funds was 5.92% for the six
months ended June 30, 2000, compared with 5.36% for the same period in 1999.
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES. Net interest income before
provision for loan losses increased $258,000 and $844,000, or 1.8% and 3.0%,
respectively, to $14.8 million and $29.4 million for the three and six months
ended June 30, 2000, compared to $14.6 million and $28.6 million for the same
periods in 1999. The increase was due to the changes in interest income and
interest expense described above. The interest rate spread was 2.41% for the
three months ended June 30, 2000, compared with 2.47% for the same period in
1999. For the six months ended June 30, 2000, the interest rate spread declined
two basis points to 2.41% compared with the same period in 1999. The net
interest margin was 3.05% for the three and six months ended June 30, 2000,
compared with 3.19% and 3.15% for the same periods in 1999. The declines in
interest rate spread and net interest margin are attributable to rising interest
rates and competitive pressures. In addition, the use of funds for the
repurchase of the Company's common stock has further impacted the net interest
margin.
PROVISION FOR LOAN LOSSES. The provision for loan losses for the three and six
months ended June 30, 2000, decreased $57,000 and $114,000, or 12.7% for each
period, to $393,000 and $786,000, compared to $450,000 and $900,000 for the same
periods in 1999. Provisions for loan losses are made based on management's
evaluation of risks inherent in the loan portfolio, giving consideration to
on-going credit evaluations and changes in the balance and composition of the
loan portfolio. In management's opinion, the allowance for loan losses, totaling
$11.8 million or 1.03% of total loans at June 30, 2000, adequately addresses the
risks inherent in the portfolio. Management will continue to review the need for
additions to its allowance for loan losses based upon its quarterly review of
the loan portfolio, the level of delinquencies, and general market and economic
conditions.
The following table sets forth ratios regarding nonaccrual loans, and loans
which are 90 days or more delinquent, but on which the Company is accruing
interest at the dates indicated. The Company discontinues accruing interest on
delinquent loans when collection of interest is considered doubtful, generally
when 90 days or more delinquent and when loan-to-value ratios exceed 55%, at
which time all accrued but uncollected interest is reversed. Total foreclosed
real estate ("REO"), net, totaled $215,000 at June 30, 2000 and consisted of
three residential properties, one of which is under contract for sale.
(dollars in thousands)
June 30, Mar. 31, Dec. 31, Sept. 30, June 30,
2000 2000 1999 1999 1999
-----------------------------------------------
Non-accrual mortgage loans ... $2,478 $2,407 $2,311 $2,251 $2,537
Non-accrual other loans ...... 45 42 45 82 82
-----------------------------------------------
Total non-accrual loans .... 2,523 2,449 2,356 2,333 2,619
Loans 90 days or more
delinquent and
still accruing ............. 263 410 326 320 224
Restructured loans ........... -- -- -- -- --
-----------------------------------------------
Total non-performing loans ... 2,786 2,859 2,682 2,653 2,843
Total foreclosed real estate,
net of related allowance ... 215 344 466 1,193 1,422
-----------------------------------------------
Total non-performing assets .. $3,001 $3,203 $3,148 $3,846 $4,265
===============================================
Non-performing loans to loans
receivable, net ............ 0.24% 0.27% 0.26% 0.27% 0.32%
Non-performing assets to
total assets ............... 0.15% 0.16% 0.17% 0.20% 0.23%
NON-INTEREST INCOME. Non-interest income decreased $302,000, or 30.1%, to
$701,000 for the three months ended June 30, 2000, compared to $1.0 million for
the same period in 1999. For the six months ended June 30, 2000, non-interest
income totaled $1.4 million, a decrease of $611,000, or 29.8% from the same
period in 1999. The decrease was primarily attributable to losses on sales of
loans and securities totaling $78,000 and $97,000 for the three and six months
ended June 30, 2000, respectively, compared
12
<PAGE>
with gains of $318,000 and $577,000 for the respective 1999 periods. The sales
of loans and securities and related gains or losses are dependent on market
conditions, as well as the Company's liquidity and risk management requirements.
NON-INTEREST EXPENSE. Non-interest expense for the three and six months ended
June 30, 2000, decreased $53,000 and increased $219,000, or 0.8% and 1.8%,
respectively, to $6.3 million and $12.6 million, compared to $6.3 million and
$12.4 million for the same periods in 1999.
Within this category, compensation and benefits increased $169,000 and $480,000,
or 4.9% and 7.1%, respectively, to $3.6 million and $7.3 million for the three
and six months ended June 30, 2000. Included in compensation and benefits
expense was a non-recurring charge of $177,000 incurred following the death of
one of the Company's directors during the second quarter of 2000.
Advertising expense increased $52,000 and $132,000, or 14.7% and 21.9%,
respectively, to $405,000 and $735,000 for the three and six months ended June
30, 2000, compared to $353,000 and $603,000 for the same periods in 1999 as the
Company continued to aggressively pursue market share growth.
Equipment expense for the three and six months ended June 30, 2000, totaled
$438,000 and $862,000, an increase of $60,000 and $67,000, or 15.9% and 8.4%,
respectively, as the Company commenced upgrades to computer hardware and
software in the branches. The Company is undertaking a project to facilitate
teller/platform automation, including document preparation and online signature
verification. These upgrades are intended to enhance customer service,
streamline the account opening process, reduce printing costs and provide
improved security and research capabilities. The Company anticipates the cost of
such upgrades will approximate $1.5 million, to be amortized over their
estimated useful lives.
Federal deposit insurance premiums decreased $126,000 and $257,000, or 66.0% and
66.2%, respectively, to $65,000 and $131,000 for the three and six months ended
June 30, 2000, as a result of a reduction in the assessment rate.
General and administrative expenses decreased $223,000 and $284,000, or 19.0%
and 12.5%, respectively, to $948,000 and $2.0 million for the three and six
months ended June 30, 2000, primarily due to a reduction in supervisory charges
realized as a result of the Bank's conversion to a state-chartered savings bank
in January 2000.
As a measure of the Company's non-interest expense control, the Company's
annualized non-interest expense, excluding amortization of intangibles, divided
by average assets improved to 1.23% and 1.25% for the three and six months ended
June 30, 2000, compared to 1.30% and 1.28% for the three and six months ended
June 30, 1999. The Company's efficiency ratio, calculated as non-interest
expense divided by the sum of net interest income plus non-interest income,
excluding gains on the sale of loans and securities, improved to 40.1% and 40.6%
for the three and six months ended June 30, 2000, respectively, compared with
41.3% and 41.1% for the comparable 1999 periods.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
There have been no material changes to information required regarding
quantitative and qualitative disclosures about market risk from the end of the
preceding fiscal year to the date of the most recent interim financial
statements (June 30, 2000).
13
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
There are various claims and lawsuits in which the Registrant is
periodically involved incidental to the Registrant's business. In the
opinion of management, no material loss is expected from any of such
pending claims and lawsuits.
Item 2. CHANGES IN SECURITIES.
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
Item 5. OTHER INFORMATION.
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
a.) Exhibits
--------------------------------------------------------------------------------
Exhibit
Number Description Reference
--------------------------------------------------------------------------------
3.1 Certificate of Incorporation of First Sentinel Bancorp, Inc. *
3.2 Bylaws of First Sentinel Bancorp, Inc. *
4 Stock certificate of First Sentinel Bancorp, Inc. *
11 Statement re: Computation of Ratios page 7
27 Financial Data Schedule attached
--------------------------------------------------------------------------------
b.) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated May 23,
2000, under Item 5, Other Events, pertaining to the appointment
of Philip T. Ruegger, Jr. as the new Chairman of the Board of
Directors.
* Incorporated herein by reference into this document from the Registration
Statement on Form S-1 and exhibits thereto of First Sentinel Bancorp, Inc.
(formerly First Source Bancorp, Inc.), and any amendments or supplements thereto
filed with the SEC on December 19, 1997 and amended on February 9, 1998, SEC
File No. 333-42757.
14
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST SENTINEL BANCORP, INC.
Date: August 11, 2000 By: JOHN P. MULKERIN
----------------
John P. Mulkerin
President and Chief Executive Officer
Date: August 11, 2000 By: CHRISTOPHER MARTIN
------------------
Christopher Martin
Executive Vice President and Chief Operating and
Financial Officer and Corporate Secretary
15
